He added that competitor Kroger
would be wise to acquire Whole Foods for $40-$45 a share. In a
note circulated to clients April 20, Kelly notes:

An acquisition of WFM by KR would make a lot of sense, in our
view. A deal would marry each company's strengths with the
other's weaknesses, unlock massive cost synergies that could
reach 3% of WFM sales, help KR expand its customer base, and
possibly provide the growth format it has been eager to
develop.

We believe KR could acquire WFM at a price of $40-45... This
target price would imply a trailing 12-month EBITDA multiple of
approximately 10-11x. Though this multiple is at the high end
of historical food retail transactions (the long-term average
transaction is 8.1x trailing EBITDA; the average since 2000 is
6.4x trailing EBITDA), most deals would not be able to generate
comparable synergies

source

Credit Suisse

Kroger has just come off a period of tremendous growth. Between
July 2012 and December 2015, Kroger stock rallied 267% from about
$11 to $41. However, competition in the food space has ramped up
from competitors like Walmart,
and the entrance of more online options. Since those December
2015 highs, Kroger stock has dropped off 26.5% to $29.71. Kroger
recorded its first negative same store sales growth numbers in 13
years during the fourth quarter of 2016.

The grocer has now gotten into a
price war with retail giant Walmart. Credit Suisse concludes
that M&A may be the best option for Kroger to get out of its
slump and return to growth. Kelly thinks that Kroger would
benefit from Whole Foods' younger, more health-conscious customer
base, and would adapt some of the Whole Foods in-store experience
that makes the chain popular, especially their prepared foods.

Additionally, Kelly sees many opportunities for cross-company
synergies of $400 to $600 million, or 2.5-3.8% of Whole Foods
sales. These include cross selling products, such as adding Whole
Foods 365 product line to Kroger, and Whole Foods adding some of
Kroger's mainstream branded products.

Kelly also sees savings opportunities in distribution, noting,
"nearly 60% of WFM stores overlap with a KR store within a
10-mile radius."